There is little doubt that privatization has become a worldwide phenomenon over the last decade and a half. During that time much has been written about why privatization has had such widespread appeal. While there are no universally accepted explanations, the poor economic and financial performance of many public enterprises and the demonstration effect resulting from cases of successful privatization have been used as convincing arguments for privatization by the International Monetary Fund and the World Bank (Berg, 1981, Kikeri, Nellis and Shirley, 1992).
Explanations for the poor performance of public enterprises have been theorized from a variety of perspectives, collectively referred to as the theory of government failure. A central theme of these theories is the idea that public ownership leads to the pursuit of objectives that detract from economic welfare maximization (Willig, 1993; Boycko, Shleifer and Vishny, 1996). The combined force of the government failure literature, the principal-agent, property rights and public theories, conclude that enterprises operating under public ownership will be less efficient compared to their private sector counterparts.
The principal-agent critique relies on arguments based on the existence of information asymmetries and the absence of market mechanisms in the public sector to justify the non-welfare maximizing behaviour of public enterprises (Wolf, 1979; Vickers and Yarrow, 1988; Andic, 1992). The property rights theory supports privatization by arguing that a simple reassignment of property rights into private hands will improve efficiency through a change in the incentive system that alters decision-making behaviour. Despite the restrictive assumptions needed to arrive at this result, the theory continues to be used to rationalize the superiority of private over public ownership. Central to the public choice argument favouring privatization is the notion that everyone involved in decision-making in the public sector seeks to maximize their own vested interest, which in general, is not identical to the public interest.
